Deteriorating Economic Situation
Lebanon is experiencing its worst economic and financial crisis in decades. The Central Bank managed to pay in November the maturing Eurobonds of $1.5 billion despite the drained dollar reserves. While some economists criticized the decision and accused the government of putting food security at stake, others were against defaulting on debt payments.
Earlier this month, BDL issued a circular to reduce interest rates on deposits while the rate on loans remained linked to the Beirut Reference Rate (BRR) with no intention to reduce it. Simultaneously, banks continue to apply unofficial capital controls amid claims that, despite the crisis, they are still able to maintain the official rate at 1507.5 LBP for one dollar, whereas reality is different. Heavy limits on dollar withdrawals have been implemented with varied allowances per bank, and people are, most of the time, unable to convert from Lira to Dollar at their banks. This has increased the demand at the currency exchange offices where dollar conversions are at a much higher rate, the latest being above 2000.
As a result of this circular and the measures taken by banks, S&P (Standards and Poor’s rating agency) downgraded three Lebanese banks to ‘SD’ (selective default). This rating is usually assigned when the agency believes that the obligor has selectively defaulted on a class of obligations but will continue to meet its payment obligation on other issues. Fitch downgraded Lebanon to ‘CC’ from ‘CCC’. This rating reflects the agency’s view of a possible debt restructuring or default amid political uncertainty.
Because of the increasing limits of bank transactions and declining economic situation, the trust in the Lebanese banking system has taken a heavy hit with mounting criticism per day of the monetary policies adopted. Public anger is evident by the decision of the Ministry of Interior to place one or two police agents at each bank branch to maintain order.
As the country awaits the formation of a new government capable of instituting an emergency plan, businesses continue to struggle. 160,000 workers have lost their jobs since October 17, and 34 percent of companies have reduced salaries by an average salary cut of 40 percent. Within only one week, over 60 companies notified the labor ministry of plans to lay off employees in mass. Furthermore, many sectors, including food and beverage, and the medical industry, have been incapable of importing products due to the dollar shortage.
One of the suggested solutions for the financial crisis is debt restructuring, which appears to be inevitable. However, according to the International Monetary Fund (IMF), Lebanon issued around $15 billion of international bonds since 2014 without ‘enhanced collective action clauses’ (CACs). The absence of these clauses means that any potential restructuring for Lebanon’s debt is likely to be complicated. Another suggestion is IMF support whose austerity plan is stringent and harsh and may include tax hikes and levies on fuel. This runs the risk of increased public anger and instability. Other suggestions are the application of a haircut on deposits or devaluating the Lira to a lower level. Whatever the path chosen, the cost will be very high and must be coupled with building a sustainable socio-economic model.
Government Formation Amid Ongoing Protests
Almost two months after the resignation of PM Hariri under heavy pressure from mass demonstrations and after several postponements, parliamentary consultations were held on December 19 and resulted in the naming of former Minister of Education Hassan Diab with 69 out of 128 votes. Diab emerged as the favorite candidate for the premiership a few hours prior to the consultations. Whereas Hezbollah and Amal would have preferred the return of Hariri, a tactical change was adopted following Hariri’s announcement that he would not participate in the upcoming government. Hariri’s decision came after weeks of negotiations and political maneuvering but failed to obtain a “Christian cover”, neither from the Free Patriotic Movement (FPM) nor from the Lebanese Forces (LF). This sectarian cover which Hariri was deprived of, was interestingly a tactic used by him to eliminate competing names proposed in the buildup to the consultations such as Samir Khatib and Mohammad Safadi. Nevertheless, in spite of the mithakiyya arguments which were raised against Diab’s nomination due to the absence of any notable “Sunni cover”, the appointment went through. The split over Diab’s naming was reminiscent of the former March 8 and March 14 divide as Hezbollah, Amal, and the FPM supported his appointment whereas the LF, Future Movement, and Progressive Socialist Party were against, with the latter opting to name Nawaf Salam, a judge at the International Court of Justice and former Ambassador to the UN. As warnings were raised about the dangers of forming a “one-color government”, it was reported from sources close to Hezbollah that such an option is not the table despite the manner through which Diab was named. Amid an increasingly dire economic situation which threatens further instability, Diab gave himself a deadline of four to six weeks to form a new government and stressed its makeup of specialized individuals from outside established parties.
The impending government formation continues as US Under Secretary of State for Political Affairs David Hale arrived in Beirut and met with official figures and party leaders such as President Aoun, Saad Hariri, Gebran Bassil, Samir Geagea, and Walid Jumblatt. While stressing the need for an independent government, noteworthy was Hale’s non-provocative tone towards the new government and Hezbollah. The coming weeks will determine whether Diab can follow through on his declared intentions and will shed some light on the guarantees provided to Hezbollah to accept a fully technocratic government.
Amid the ongoing struggle between the established political parties, opposition movements and protesters have found themselves on the side of the so-called March 14 camp in the rejection of Diab’s naming, albeit for different reasons, and have warned against the increasing sectarianization of the ongoing power struggle. Whether they can survive the most intense period of cooptation, maintain their mobilizing power, and steer the narrative away from sectarianism towards original socioeconomic demands remains to be seen. This all goes hand in hand with an increasing level of violence by security forces, party supporters, and a section of protesters.
Diab’s government formation efforts face the near impossible challenge of pleasing the different players on both the internal and external scene of Lebanese politics: parties who nominated him during consultations and insist on preserving their interests; parties who did not nominate him and whose support he needs to gain legitimacy and push forward with any serious reforms; protesters who, almost unanimously, continue to refuse to even negotiate with him let alone accept the results of his efforts; foreign players such as the US which controls the IMF funds and the Gulf which is keen on diminishing Hezbollah’s role in the upcoming government; and international donors led by France that have set strict conditions of structural reforms and a major change in governance for the provision of any funding. The only manner in which Diab is able to attract the acceptance of most of the street and political parties is the formation of a government as free from political participation as possible and constituted of technocratic figures known for their independence, credibility, and vision. Achieving this feat will allow his cabinet to obtain the first approval but will be followed by the real challenge of following through with a clear plan of reform and quick implementation.
International Meetings on Lebanon
France has been playing an active role since Hariri’s resignation in pushing through some form of agreement between Lebanese parties as well as international players regarding the new government. Within these efforts, meetings were held between representatives from France, UK, and US to discuss Lebanese political developments. The main focus revolved around responding to the claims of protesters and formation of a credible government capable of adopting the necessary measures to remedy the economic and financial situation. Noteworthy however is the divergence of views between France and the US over the handling of the crisis in Lebanon. The former prefers a more balanced approach whereas the latter which prioritizes its employment in the confrontation with Iran. Similar demands were reiterated in the International Support Group meeting held a few weeks later as detailed below.
The International Support Group for Lebanon, co-chaired by France and the UN, met in Paris on December 11 to discuss the ongoing crisis in the country. Some of those present include China, Germany, UK, US, EU, Arab League, IMF, and World Bank. The group called on Lebanese authorities to quickly form a new government capable of adopting comprehensive economic reforms that restore fiscal and financial stability as well as deal with long-stranding structural deficiencies in the Lebanese economy. Whilst reaffirming the validity of the pledges of the 2018 CEDRE conference, the release of financial aid is linked to serious commitments to reforms and combating corruption.
Most of the international players claimed “non-interference” in the government formation process and restrained from commenting on the name of Diab or his way of nomination. While diplomatic circles have rejected the media reports alluding to a US-Iranian détente notably about Lebanon, foreign embassies seem to be giving some time and waiting to see what kind of government will Diab be able to form, all while re-insisting on the criteria set in the ISG statement and warning about the gravity of the economic situation.
Passage of the Caesar Law and Further US Sanctions on Hezbollah
Years after the original proposal of the bill, the US Congress passed the Caesar Syria Civilian Protection Act of 2019 which allows sanctions against Syrian government officials and military leaders involved in war crimes and crimes against humanity. This also extends to any government or private entity which provides support to the Syrian military or even the reconstruction process of the country prior to accountability for the committed crimes. Both the private sector and the upcoming Lebanese government have to be aware of the dangers of involvement in the reconstruction process amid continued hostility from the international community. The ramifications of uncalculated initiatives towards Syria could be very costly to Lebanon whose economy is already in serious danger.
In a continuing trend of US pressure, the US Department of Treasury designated Nazem Said Ahmad and Saleh Assi on its list of Hezbollah financiers with accusations of raising funds for the party. This also included Tony Saab, an employee of Assi’s company. This constitutes the first targeting of a Christian in relations to Hezbollah thus indicating an expansion of the list of targets beyond the Shia support base of Hezbollah. Ahmad and Assi are reportedly involved through their businesses in the Democratic Republic of Congo of money laundering, bribery, tax evasion, and use of political connections for unfair market access.
Almost a week later, the German parliament passed a resolution which bans the activities of Hezbollah in the country and called for its designation on the EU terrorist list. As of yet, the EU differentiates between the political and military wings of the party, with only the latter classified as a “terrorist group”. If such a proposal goes through, extensive scrutiny would target Hezbollah’s assets and funds in Europe, and it could complicate the relations of EU and EU member states with Lebanon. Nonetheless, other EU member states have opposed widening the ban and thus the proposal is unlikely to go through.References
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